12/01/2009 @ 12:01AM

Running On Empty

Advocates of federal health care tend to be particularly insistent upon two arguments–ironic, but not unsurprising, given that they are both wrong. First, they argue that the “public option” is designed merely to provide competition for consumers and that with a few large private insurance companies dominating the market, a public player is necessary to bring down costs. President Obama has stated repeatedly that the public option is not designed to eliminate private-market participants–although he admitted several years ago to desiring a single-payer system that would, by definition, eliminate private insurance. Second, lawmakers pushing a federal expansion of health care claim it is necessary to reduce costs.

Rather than speculate about the competitive effects of a public option or likely costs of federal intervention, we should examine an analogous and recent reference point: American car companies.

Of the three major U.S. automobile manufacturers, Chrysler, General Motors and Ford, only Ford refused government assistance. Chrysler and GM, on the other hand, dipped deep into Uncle Sam’s pocket on multiple occasions, claiming that a bankruptcy filing would be catastrophic and that they had new plans for viability that would eventually save the public money. Of course, public assistance did not prevent bankruptcy filings by Chrysler, GM and GM’s auto financing arm,
GMAC
–the
Fannie Mae
of cars.

To date, the Treasury has poured $13.5 billion into Chrysler, $52.9 billion into GM and $12.5 billion into GMAC, which provides cheap financing for GM and Chrysler purchases and is expected to receive approximately $2 billion in additional financing in the near future. Some policy makers try to sell us on the fanciful notion that these funds are not lost; they are an “investment,” just like health care reform would be.

How has that investment turned out thus far? A recent National Taxpayers Union study authored by Rochester Institute of Technology economics professor Thomas D. Hopkins reveals that the $78.9 billion in public funds committed to Chrysler, GM and GMAC equals a $12,200 subsidy for each GM car and a $7,600 subsidy for each Chrysler sold since the bailout.

Apparently the good news is that GM plans to start repaying the $6.7 billion loan it owes the government. Whatever creativity GM lacks in car manufacturing it understands in bookkeeping. The Wall Street Journal has reported that GM plans to pay government funds back with other government funds, which is sort of like paying down your
American Express
bill with your
MasterCard
. Your debt remains the same.

In terms of the equity “investment” held by U.S. taxpayers, that, too, government officials say they expect to recoup. All GM has to do is achieve a $67 billion market cap, something it has never reached even at its highest stock price ever. Incidentally, as a taxpayer and GM shareholder, you should not expect a dividend check anytime soon.

Then there are the competitive effects of the government’s intervention in the market, which allows some companies to operate under less stringent market conditions. Ford, as the only car company that refused to put taxpayer dollars at risk and avoided bankruptcy, has seen its stock price more than triple from its $2.30 Jan. 2 open, to its $9 recent high. So, it would appear that Ford has benefited from its competitors’ failures, right? Not so fast.

Ford’s cost of capital, an important metric in assessing a company’s costs of doing business and future prospects, is significantly higher than its competitors. Cost of capital explains how government sponsored enterprises like Fannie Mae and
Freddie Mac
were able to grow so large and place so much of the financial system at risk. The federal government’s implicit backing of Fannie’s and Freddie’s debt obligations enabled them to borrow far more and much more cheaply than their private competitors.

We now are seeing the same thing with car companies. The National Taxpayers Union study also reveals that GMAC’s three-year non-FDIC backed bonds yield investors 8.8%. However, GMAC’s comparable FDIC guaranteed bonds from November only yield 1.75%. The government currently guarantees approximately $7.5 billion of GMAC’s private debt, which equates to a $500 million difference in annual borrowing costs.

Additionally Fords financing arms October 2014 bonds currently yield 8.37% and are rated B- by Standard & Poors. GMACs lesser CCC rated December 2014 bonds yield a lower 7.30%, despite presumably greater risk given its rating. This means that it is significantly more expensive to do business as a purely private entity competing with an explicitly or implicitly government-financed entity.

Pete Sepp, a vice president with the National Taxpayers Union, said, “We were among many voices warning Congress about this very same problem with the GSEs in the 1990s and early 2000s, but were ignored, and now were seeing the same danger signs with the auto industry. If lawmakers do the same thing for health care, we may very well be looking at strike three for our economy.”

Not only might purely private insurance companies incur higher capital costs, but they will face more stringent legal and market conditions. Publicly traded insurance companies have an obligation to maximize shareholder profits, whereas a public insurer would not. And a subsidized public insurer would be able to operate with much smaller margins than a private insurer.

Still, health care reform advocates argue that a public option, like the auto bailouts, will benefit all of us by reducing overall economic costs and increasing competition. In fact, it will do exactly the opposite by making it more expensive for private companies to compete, thus driving them out of the market and leaving government with a monopoly–and eventually, perhaps, a monopsony.

But if that sounds distressing, think of it as an investment in the future, just like the car bailouts. And next time you see your neighbor climb into a shiny, new fuel-efficient GM car, you can say to yourself, “Now that’s money well spent.”